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Oil: America’s Comeback

Forget all the noise and protests about coal seam gas and
fracking in the US, there's a much more important development at
work, one that could change the world as we know it.

The fracking will lift output of gas, which in turn, will push
the US dollar higher, putting enormous pressure on US industry
and relieving pressure on Australia, China and other
economies.

The greenback's ascent will be slow (but they will be cheering
in Europe) as America's oil imports fall as gas production
rises.

In fact oil imports could halve between now and 2035, with the
amount spent each year falling by hundreds of billions of dollars
a year.

That in turn will cut the supply of greenbacks to the world,
adding to funding pressures for regions short of the currency,
such as Europe.

America is slowly but surely increasing its energy (chiefly
oil) self-sufficiency because of the rising level of production
of gas from new sources such as shale, tight gas from existing
fields, blended ethanol and some renewable sources.

And the fracking production of gas to boost US reserves to
around the 100 year level (now 8 years, but that's up from 4
years thanks to the surge in drilling and production).

So those fears about the strength of the Australian dollar
might be misplaced if you think the currency will be high for a
long time.

The changes will have a slow but startling impact on world oil
and gas prices, commodities generally, and on the value of the US
dollar and other currencies.

The Agency says it sees US dependence on imported petroleum
liquids declining "primarily as a result of growth in domestic
oil production by more than 1 million barrels per day by 2020; an
increase in biofuels use to more than 1 million barrels per day
crude oil equivalent by 2024; and modest growth in transportation
sector demand through 2035.

"Net petroleum imports as a share of total U.S. liquid fuels
consumed drop from 49 percent in 2010 to 36 percent in 2035.

"Proposed fuel economy standards covering vehicle model years
2017 through 2025 that are not included in the Reference case
would further reduce projected liquids use and the need for
liquids imports.

"Imported liquid fuels as a share of total U.S. liquid fuel
use reached 60 percent in 2005 and 2006 before falling to 50
percent in 2010."

The Agency forecasts that the decline will continue, with the
level of imports dropping to 36% by 2035, lower than the 42%
forecast in last year's outlook.

The EIA said that by 2035, the "net import share of total U.S.
energy consumption in 2035 is 13 percent, compared with 22
percent in 2010. (The share was 29 percent in 2007, but it
dropped considerably during the recession)".

That will be an enormous change in the US: at 13%, its virtual
self-sufficiency for the US and with much of the imports coming
from Canada, Mexico and the Western hemisphere it has
considerable strategic interest as well.

America won't be as dependent on Middle Eastern crude, a point
Israel and Saudi Arabia had better heed, along with the various
emirates in the Gulf.

Instead, China and Europe will be major buyers, plus other
economies in Asia such as Japan, Korea and India.

Australia will be the largest energy exporter in the major
industrialised economies, shipping tens of millions of tonnes of
LNG to China, Japan and other Asian economies, and huge amounts
of coal, uranium and some oil.

The LNG will come from a mixture of natural gas, coal seam
methane and some shale gas, although much of that (from around
the Cooper Basin in South Australia, the Northern Territory and
Queensland) will be used to keep the existing basin fields
supplying gas to much of the east coast.

According to a survey conducted last year by the EIA,
Australia has the 6th largest potential reserves in the world of
so-called unconventional gas, the same stuff which is changing
the energy make up of America.

In the US, there's not only the dramatic impact of the
expansion in gas production, but much of it so-called 'wet' gas
from shale and tight rock, which contains more liquids than 'dry'
gas.

BHP Billiton has said it will push ahead with boosting its
liquids production from its growing exploration areas in the US
Midwest, rather than just pumping gas (where prices have slumped
alarmingly in the past two years, and will remain low for years
to come).

"Much of the growth in natural gas production is a result of
the application of recent technological advances and continued
drilling in shale plays with high concentrations of natural gas
liquids and crude oil, which have a higher value in energy
equivalent terms than dry natural gas," the EIA said.

Shale gas production is forecast to increase from 5.0 trillion
cubic feet in 2010 (23% of total US dry gas production) to 13.6
trillion cubic feet in 2035 (or 49% of total dry gas
production).

This surge will change power generation, home and industrial
supplies and make more oil available for export from the south
and see coal production reduced.

The natural gas share of electric power generation will
increase from 24% in 2010 to 27% in 2035, and the renewables
share is forecast to go from 10% to 16% over the same period.

"Over the next 25 years, the projected coal share of overall
electricity generation falls to 39 percent, well below the
49-percent share seen as recently as 2007, because of slow growth
in electricity demand, continued competition from natural gas and
renewable plants, and the need to comply with new environmental
regulations," the EIA said.

"Domestic crude oil production has increased over the past few
years, reversing a decline that began in 1986.

"U.S. crude oil production increased from
5.1 million barrels per day in 2007 to 5.5 million barrels per
day in 2010.

"Over the next 10 years, continued development of tight oil,
in combination with the ongoing development of offshore resources
in the Gulf of Mexico, pushes domestic crude oil production in
the Reference case to 6.7 million barrels per day in 2020, a
level not seen since 1994.

"Even with a projected decline after 2020, U.S. crude oil
production remains above 6.1 million barrels per day through
2035."

And the US will become a modest competitor to Australia and
the Middle East in LNG.

"The United States is projected to become a net exporter of
liquefied natural gas (
LNG
) in 2016, a net pipeline exporter in 2025, and an overall net
exporter of natural gas in 2021.

"The outlook reflects increased use of LNG in markets outside
of North America, strong domestic natural gas production, reduced
pipeline imports and increased pipeline exports, and relatively
low natural gas prices in the United States compared to other
global markets," the EIA said.

But as dramatic as this is, there's an even more important
impact on the value of the US dollar.

The US current account deficit is dominated by oil imports
valued at around $US300 billion a year.

The conventional wisdom is that as the US economy recovers (as
it is now seeming to do), the current account deficits will rise
and foreign central banks will start accumulating more
greenbacks.

But if oil imports are falling, the current account deficits
won't rise by nearly as forecast, in fact they could remain
steady or contract slightly as the economy grows, meaning there's
actually a fall in the amount of currency being pumped into the
rest of the world.

That in turn will drive up the value of the US dollar, which
could then help drive down the prices of oil and other
commodities (gold and silver bugs won't be amused).

And, as the value of the greenback continues to remain high,
oil prices won't rise as much as many projections forecast,
meaning the US current account deficit could shrink even further
as the value of the falling amount of oil declines.

Look out for the appearance of current account surpluses in
the US (last seen in the 1990s).

Watch also for oil and other commodities to be priced in a
basket of currencies, or even in the Chinese currency if it is
floated.

Weak or hard to price commodity prices means more pressure on
the Australian economy and the dollar in coming years and a
tougher time for governments and regulators.

But it could help relieve pressures here from the high dollar
and the resources boom and boost national income again simply via
the impact of the lower value of the dollar (as it did in late
2008 when the crash was happening and our export income soared as
the dollar fell).

According to figures released late last month by the federal
government's Bureau of Resources Economics, Australia is one of
the world's top ten energy players.

The energy industry accounts for about 5% of total industry
value added in 2009-10, or around $68.2 billion.

Australia is the world's ninth largest energy producer,
accounting for around 2.5% of world energy production and 5% of
world energy exports.

In 2009-10, net energy exports accounted for 68% of domestic
energy production, while domestic consumption accounted for the
remaining 32%.

The Bureau said that in 2009-10, coal accounted for 37% of
Australia's total primary energy supply, followed by oil (35%),
gas (23%) and renewable energy sources (5%).

Earnings from energy exports were around $70 billion in
2010-11, accounting for 33% of the total value of Australia's
commodity exports.

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